Commissioner of Internal Rev. v. Gregory Run Coal Co.

• Decision Date: 09 April 1954
• Docket Number: No. 6727-6730,6767.,6727-6730
• Citation: 212 F.2d 52
• Parties: COMMISSIONER OF INTERNAL REVENUE v. GREGORY RUN COAL CO. COMMISSIONER OF INTERNAL REVENUE v. VINCENT. COMMISSIONER OF INTERNAL REVENUE v. J. E. VINCENT CO., Inc. (two cases). B. H. SWANEY & SONS, Inc. et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

212 F.2d 52 (1954)

COMMISSIONER OF INTERNAL REVENUE v. GREGORY RUN COAL CO.

COMMISSIONER OF INTERNAL REVENUE v. VINCENT.

COMMISSIONER OF INTERNAL REVENUE v. J. E. VINCENT CO., Inc. (two cases).

B. H. SWANEY & SONS, Inc. et al. v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 6727-6730, 6767.

United States Court of Appeals Fourth Circuit.

Argued March 16, 1954.

Decided April 9, 1954.

Sidney B. Gambill, Washington, D. C. (James H. Beal, Robert F. Banks and Reed, Smith, Shaw & McClay, Pittsburgh, Pa., on brief), for Gregory Run Coal Co., J. E. Vincent and J. E. Vincent Co., Inc.

Robert B. Ross, Sp. Asst. to Atty. Gen. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack and Lee A. Jackson, Sp. Assts. to Atty. Gen., on brief), for Commissioner of Internal Revenue.

Arch M. Cantrall, Clarksburg, W. Va. (W. G. Stathers and Stathers & Cantrall, Clarksburg, W. Va., on brief), for B. H. Swaney & Sons, Inc., and Swaney Contracting Company.

Richard L. Levy, William T. Coleman, Jr., Philadelphia, Pa., Edgar J. Goodrich, Lipman Redman, Washington, D. C., Dilworth, Paxson, Kalish & Green, Philadelphia, Pa., and Guggenheimer, Untermyer, Goodrich & Amram, Washington, D. C., on brief for J. Robert Bazley, Inc. and John Schumacher amici curiae.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

These appeals and cross appeals relate to the income taxes for 1947 of J. E. Vincent; the income taxes of J. E. Vincent Co., Inc. for the fiscal year ending April 30, 1948 and the fiscal year May 1, 1948 to January 3, 1949; the income, declared value excess profits, and excess profits taxes for the period June 11, 1945 to December 31, 1945 and income taxes for 1946 of Gregory Run Coal Company and the income taxes of B. H. Swaney & Sons, Inc. for the fiscal year ending September 30, 1947, and of Swaney Contracting Company for the fiscal year ended July 31, 1947. J. E. Vincent and the named corporations were engaged in the business of strip mining of coal in Harrison County, West Virginia.

The most important question for determination is the disposition of the allowance for depletion, which in the case of coal mines is 5 per centum of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect to the property. See Internal Revenue Code, § 23(m), § 114 (b)(4), 26 U.S.C.A. §§ 23(m), 114(b), § 29.23(m)-1 of Treasury Regulation 111.¹

Other questions relate to (1) the right of the Gregory Run Coal Company, one of the Vincent corporations, to deduct the amount of reserves set up by it in 1945 and 1946 to cover the cost of restoration work to be done thereafter; (2) the inclusion in the taxable income of Vincent for the year 1947 of the sum of $808,064.46 turned over by him to J. E. Vincent, Inc. in that year; and (3) the inclusion in the taxable income of J. E. Vincent, Inc. for the year 1947 of the sum of $53,795.64 paid by J. E. Vincent, Inc. to Gregory for coal purchased from Gregory and sold by J. E. Vincent, Inc.

In the spring of 1945 Vincent acquired four leases of coal lands which entitled him to strip mine coal on Gregory Run in Harrison County, West Virginia, at a specified royalty ranging from 10 to 12c per ton, payable in each case to the lessor. All of the leases obligated the lessee to comply with the laws of West Virginia which impose a duty on coal strippers to backfill and regrade the land stripped of coal and to plant trees and vegetation on it. W.Va.Code of 1949, Ch. 22, § 2461(5).

On June 12, 1945 Vincent assigned these leases to the Gregory Run Coal Company, a West Virginia corporation, the stock of which was issued to him and J. B. Williamson in equal shares in consideration of the payment of $500 by each of them. Under the terms of the assignment Gregory was to pay Vincent the sum of $10,000 and a royalty of 40c per ton of the coal mined and sold. Under an arrangement between Vincent and Williamson one-half of this royalty was to go to Vincent as part consideration for the assignment of the leases, and one-half to Williamson for the use by Gregory Run of a tipple owned by Williamson. These sums were held to be reasonable by the Tax Court. In order to carry on the operation Gregory Run purchased from Williamson strip mining equipment for the sum of $73,142.50 to be paid at the rate of 23.8c per ton of coal mined. Gregory also purchased additional equipment from Mrs. J. B. Williamson for $13,100 to be paid for at the rate of 6c per ton of coal mined.

At or about the same time Vincent entered into an agreement to sell to J. H. Weaver Company, a corporation, all of the strip coal that would be produced by Vincent from the leased premises and the Weaver Company agreed to pay the prevailing maximum sale price whether fixed by the Office of Price Administration or established by market conditions, less 25c a net ton, the price to be adjusted in case of a decrease in the market. Vincent was to pay all the rents and royalties due the lessors for the coal produced and sold. This agreement was assigned by Vincent to Gregory Run.

Also about the same time Vincent incorporated the Summit Fuel Company under the laws of West Virginia; and he and Williamson each acquired one-half of this stock. Gregory Run and Summit Fuel entered into a joint agreement for the mining of the leased property and the transportation and loading of the coal. Under the agreement this was to be accomplished by the use of the tipple and strip-mining equipment belonging to Gregory Run, the use of motor vehicles belonging to Summit Fuel, and labor furnished by Summit Fuel. Summit Fuel was to mine and haul the coal to the tipple and process it and load it on the railroad cars and Gregory Run was to sell it. Summit Fuel also agreed to refill and recondition the surface of the mined area, in accordance with the laws of West Virginia; but Gregory Run was to obtain the permit required by the state law and bear the expense of the bond, and pay the cost of the refill.

Gregory Run filed its income tax returns on the accrual basis for the period from June 11, 1945, when it was incorporated, to the end of the year, and also for the year 1946. It claimed deductions in these years for reserves for backfilling in the respective amounts of $14,352.15 and $22,354.30, computed at the rate of 10c per ton mined. No backfilling has actually been done by or on behalf of Gregory Run.

On February 24, 1947 Gregory Run assigned the coal leases to Coal Service Corporation which agreed to substitute its bonds for those of Gregory Run so as to exonerate Gregory Run from liability thereunder and Gregory Run agreed to indemnify Coal Service against loss arising out of Gregory Run's operations on the leased premises, except with respect to claims of lessors based on the failure of Gregory Run to backfill and restore the property.

The Commissioner disallowed the deductions claimed by Gregory Run for the estimated cost of backfilling. The Tax Court found for the Commissioner on this issue and Gregory Run has appealed.

Depletion Issue

The depletion issue is brought to this court by the appeal of the Commissioner in the cases of Gregory Run, No. 6727, Vincent, No. 6728, and Vincent, Inc., Nos. 6729 and 6730; and also by B. H. Swaney & Sons, Inc. and Swaney Contracting Company in case No. 6767. The question involved is whether the taxpayer, who mined the coal under the contracts herein described, as distinguished from the taxpayer, who held the leases on the coal land, had such an economic interest in the operation as to entitle it to take the deduction for depletion allowed by the federal statutes.

Gregory Run Depletion

Specifically the question in this regard is whether Gregory Run, in computing its depletion deduction for its tax years 1945 and 1946, was required to deduct from the gross income of its mining property the amounts it accrued and paid during these years to Summit Fuel, with the result that Summit Fuel could take a depletion deduction on its gross income. Summit Fuel, being controlled by Vincent, did not claim the deduction. This fact, however, did not affect the computation of the gross income of Gregory Run subject to the depletion deduction.

The contractual relationship between Gregory Run and Summit Fuel has already been described. In accordance with the agreement between them, Summit Fuel from June 11, 1945 to December 31, 1945 stripped and hauled coal from the leased properties and was paid by Gregory Run the sum of $222,617.43 therefor. In 1946 Summit stripped the land and hauled the coal until July 1, and thereafter Gregory Run did the stripping and Summit Fuel the hauling. During 1946 Gregory Run paid Summit Fuel $189,005.63 for stripping and $86,367.19 for hauling; and these amounts were reported as income by Summit Fuel in 1945 and 1946. The Commissioner held that Gregory Run should exclude these amounts from its gross income in computing its depletion allowance. The Tax Court decided in favor of Gregory Run on this point and thereby denied Summit Fuel the right to share the deduction for depletion; and the Commissioner has appealed.²

Swaney's Depletion

A similar question arises with respect to the denial of a depletion deduction to B. H. Swaney & Sons, Inc. and Swaney Contracting Company in Case No. 6767. On December 24, 1945 Vincent entered into a contract with Swaney Contracting Company, a West Virginia corporation, wherein he employed the corporation to strip mine coal covered by the Dawson and other leases to Vincent on Lambert's Run. Under the contract Vincent provided the sidetrack and the tipple and the men to operate them, paid their wages, and had complete charge of the coal after it was loaded or dumped at the tipple. Swaney Contracting furnished the equipment and employees to mine and haul 25,000 tons of coal a month and bound itself to backfill and restore the land in accordance with the...